London's
deserved reputation as the world's
leading international bullion trading
centre has its basis in history.

The
origins of the emergence of London
as a gold trading centre can be traced
back to around 1671 when the young
Moses Mocatta crossed the North Sea
from Amsterdam (where he had been
trading in sugar and diamonds) to
set up business as a merchant, opening
an account with Alderman Edward Backwell.
Initially his main business was in
diamonds, but records from the East
India Company in February 1676 show
'By cash of Moses Mocatta for freight
on 75 ounces of gold on their ships
"Nathaniel" and "Society"
- £6'. This gold was used to
pay for diamonds, and shipments of
gold and silver into London soon became
regular events.

When
Napoleon escaped from Elba in 1815
and returned to France to raise his
army, the price of gold in the
London market jumped overnight from
£4.6.6d an ounce to £5.7.0d.
Nathan Mayer Rothschild had been ordered
by the British Treasury to buy gold
to fund the Duke of Wellington's troops
in the Battle of Waterloo. At the
end of the Napoleonic wars, Britain
adopted a formal gold standard (although
an unofficial gold standard had been
operating since 1717). The rest of
Europe remained on the silver standard
until increasing supplies of gold,
first from Brazil in the eighteenth
century, then from Russia, California,
Australia and South Africa in the
nineteenth century, made it possible
for the rest of Europe to switch to
the gold standard.

The
threat of WWI resulted in most countries
suspending gold payments, except for
urgent settlements, and the gold standard
collapsed as central banks started
keeping reserves in currencies that
could be exchanged for gold. As the
war ended, a crucial step was to restore
London as the market place for gold.
Initially the Bank of England had
an agreement with South African mining
finance houses for them to ship their
gold to London for refining, after
which it would be sold through N M
Rothschild 'at best price obtainable,
giving the London market and the Bullion
Brokers an opportunity to bid'.

Post
WWI
Thus on 12th September 1919 at 11.00
a.m., the first gold fixing took place,
when the price of gold was fixed at
£4.18s.9d. per fine ounce. The
higher price that day reflected the
sterling/dollar exchange rate in New
York. The New York gold price was
$20.67 per ounce. The bids were made
by telephone for the first few days,
but it was then decided to hold a
formal meeting at the Rothschild offices
in New Court, St Swithin's Lane.

Although
the London fix continued to be in
sterling for almost another 50 years,
what really counted was the dollar
price of gold, as the dollar gradually
replaced sterling as the world's favourite
reserve currency.

Britain
made a partial return to the gold
standard in 1925, however, on 21 September
1931, the gold standard was suspended.
Over 200 years of a stable gold price,
save for short interludes in the Napoleonic
Wars and WWI, had ended. In addition,
the reputation of sterling, backed
by gold as the international currency
was over, sterling was devalued.

The
US remained on the gold standard,
with the price fixed at $20.67 until
1933, when Roosevelt not only banned
the export of gold and halted convertibility
of dollars into gold, but also ordered
US citizens to hand in all the gold
they possessed (the prohibition on
gold lasted until 31 December 1974).
Roosevelt, who was trying to boost
the US economy, was concerned that
the accompanying inflation would weaken
the dollar and lead to an outflow
of gold. Roosevelt took to deciding
the gold price himself. On the 31st
January 1934, the gold price was raised
to $35 an ounce (a total devaluation
of the dollar of almost 40%) and the
US resumed the gold standard.

The
fixing thrived until the outbreak
of WWII on 3rd September 1939, when
the London gold market closed. No
fixings were held for almost 15 years,
until 22nd March 1954, when the London
market was permitted to resume the
fixing. The final fixing before World
War II had been at a price of £8.1s.0d
an ounce, almost double that of 1931.
On the 22nd March 1954 gold fixed
at £12.8s.6d, the increase from
the last pre-war fix was due to the
devaluation of sterling. Although
the fix was still in sterling, the
main concern of the BoE was to keep
it in line with the equivalent of
$35.

The
task of keeping the sterling price
in line with $35 became increasingly
difficult, as the private market for
gold grew. As early as 1961, the BoE
found it had to sell occasionally
from reserves on the fix to hold the
price at $35. This lead to the creation
of the gold pool - an alliance between
central banks around the world to
maintain the $35 level. The pool worked
well until 1965, when private buying
of gold begun to exceed mine supply,
forcing central banks to sell gold
reserves into the market to hold the
price steady. In 1968, when the Tet
offensive in Vietnam touched off a
tidal wave of buying, the pool lost
3,000 tonnes trying to hold the price
down.

Post
1968
On the 15th March 1968, the authorities
closed the London gold market for
two weeks, following an unprecedented
three-day speculative surge of gold
buying. When the London gold market
re-opened on the 1st of April 1968,
it fixed the price in dollars not
sterling, with the gold price no longer
set, but free to float and with prices
set twice a day, both in the morning
and afternoon.

Over
the course of more than 80 years of
the gold fixing, the highest fix was
US$850 per ounce on the 21st of January
1980, amid the political crisis in
the Middle East, high oil prices and
inflation. The longest fixing lasted
for 2 hours and fifteen minutes when
the stock markets crashed on Black
Monday in late October 1987. The highest
turnover occurred in March 1968 just
before the gold pool collapsed - 14,180
400oz London Good Delivery bars were
traded.

Extracts
from "The World of Gold" by
Timothy Green
Reproduced by permission of Rosendale
Press Ltd, e-mail: info@rosendal.demon.co.uk